Arena Pharmaceuticals - The Obesity Blockbuster Drug Company and More
Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Retail investors were right and Wall Street was wrong about the approval of Arena Pharmaceuticals, Inc's (NASDAQ: ARNA) lead drug candidate Belviq (Lorcaserin). Here are the four coming catalysts for Arena:
1. The Obesity epidemic gives Arena's Belviq blockbuster drug status.
2. The growing obesity market is enormous and Belviq has a broad label.
3. Physicians control the demand for Belviq not the consumer.
4. ARNA is a buyout, merger, or partner candidate.
I believe anyone of these will drive the price of the stock much higher.
My citizen petition filed with the FDA helped ordinary citizens, the FDA, scientists, retail investors, and physicians understand why the FDA must approve Belviq. In my research we saw retail investors fight a bitter battle with Wall Street, with many analysts preoccupied with spreading fear, and heavily shorting the company's stock, hoping to reap the benefits of a company shorted into oblivion. A whopping 43 million shares of Wall Street shorted stock interest still remain trapped turning over and over almost on a daily basis to keep the lid on the stock while institutional investors take their ever increasing positions. Virtually, millions of shares are being traded almost daily, trying to tire and weaken the long investor (the investor who invests because the future is profitable). Steadfastly, we believe Belviq will be a blockbuster drug generating more than $1 billion of revenue for its owner each year. We attempted to school Wall Street financial "wizards" who didn't have the medical expertise to see the fundamentals of the equation here. They ignored our efforts, choosing instead to focus on a competing drug?
Reiterating some of the attempted education:
First, Belviq is a unique single-agent molecule developed using a very innovative high technology called GPCR CART Technology. The FDA correctly approved more than just a new drug candidate for the worst advancing epidemic in U.S. History - Obesity and all the comorbidities that come along with it.
The FDA gave a seal of approval to Arena's proprietary technology that has yielded hundreds of patents as revealed on page 19 of Arena's 2011 annual report. Yes, a promising future for Arena has just begun. We encourage retail investors to hold their winning stock positions in ARNA, and add to positions if possible, because we believe long investors will be handsomely rewarded for patience in this stock. Reading investor message boards on Yahoo, Google and Microsoft can be misleading and often times confusing. The FDA's approval is a testament that Belviq is a super drug because medicines may only be placed on the US market when they are safe, effective and of good quality. This is verified in the new drug authorization process. On June 27, 2012, the FDA approved Belviq for marketing. However, what few investors realize, including Wall Street, is that Belviq also received the very broad label. This usually is more important than the drug approval itself, since drugs can be approved, but with severe label restrictions which restrict use and marketing and therefore revenues. Additionaly, there is not a single documented FDA drug ever that has achieved blockbuster status being sold through mail order. This is NOT the case with Arena, as it is with the competing drug.
In fact, the very broad label the FDA gave Belviq actually gives physicians, broad discretion in the way a patient's illnesses, diseases, or co-morbidities can be managed with the use of Belviq. The demand for Belviq will come from knowledgable physicians who have their patient's best interests at heart.
1. The Obesity epidemic gives Arena's Belviq blockbuster drug status.
We learned from past blockbuster drug sales history that even non-epidemic treatment drugs' have grown to blockbuster status. For example, past experience shows blockbuster drugs meet annual sales targets from serving a huge population with medical need:
Drug - Condition - Pharma : 2010 US Sales
Lipitor - Cholesterol - Pfizer (NYSE: PFE) : $5,329,000,000
Zyprexa - Antipsychotic - Eli Lily : $2,496,000,000
Levaquin - Antibiotic - Johnson & Johnson : $1,312,000,000
Concerta - ADHD/ADD - Johnson & Johnson : $929,000,000
Protonix - Antacid - Pfizer : $690,000,000
Plavix - Anti-Platelet - Bristol-Myers : $6,154,000,000
Seroquel - Antipsychotic - AstraZeneca (NYSE: AZN) : $3,747,000,000
Singulair - Asthma - Merck (NYSE: MRK) : $3,351,000,000
Actos - Type 2 Diabetes - Amgen : $2,304,000,000
Can there be any doubt Arena's Belviq is a blockbuster drug, given the broad labeling for comorbidities? We think not.
2. The Obesity market is enormous:
The FDA knows the obesity market represents the largest healthcare crisis facing the country today. Retail investors know statistics that Wall Street doesn't seem to grasp. Obesity has a far-ranging negative effect on health. Obesity-related diseases account for nearly 10 percent of all US medical spending, or an estimated $147 Billion Dollars each year and cause an estimated 300,000 premature deaths in the US. Current estimates of the economic cost of obesity in the United States. The recent Gallop Poll found that Obesity costs cities an estimated $80 billion a year in healthcare costs. Health insurance will cover Belviq.
3. Physicians control the Demand Side for Belviq not the consumer:
Belviq's demand side is rather unique. It is characterized by a complex interrelationship amongst patients, doctors, hospitals, insurance providers and reimbursement systems. Usually, prescription medicines, the ultimate consumer (i.e. the patient) systematically differs from the decision maker (generally the prescribing doctor) and very often also from the bearer of the costs (generally the health system). I believe our health insurance system should cover Belviq because of the comorbidities in the labeling. Unlike other markets, the patient is normally not in a position to choose directly which product he/she wishes to use. The relationship between patient and doctor is characterized by an information asymmetry where the patient generally must rely on the doctor's expertise. Doctors are therefore decisive for the choice of obesity pharmaceutical products used (type and volume). This explains why it is historically so important for Arena and Eisai (originator companies) to remain in constant contact with doctors. In addition to detailing (visiting of doctors by pharmaceutical companies), the originator companies confirm that medical journals and seminars are the main source of information for doctors on developments in relation to medicines.
Arena as an active participant in the pharmaceutical sector is R&D driven and regulated. On the supply side, there are two types of companies. So-called "originator" companies are active in research, development, manufacturing, marketing and supply of innovative medicines. The average time taken from patent application filing to product launch is typically 8.6 years. Arena's Belviq is subject to secure patent protection, which is needed to provide a reward for innovation and incentives for future research. Arena's patent protection will not expire for over 14 years and in some cases can be extended. Competition from generic manufacturers cannot enter the market with medicines that are equivalent to Belviq typically at significantly lower prices for the benefit of the consumer.
In general terms, the life cycle of an originator product can be divided into three distinct phases: the pre-launch period, where R&D as well as regulatory (governmental) approval take place; the marketing and sales period, during which the product benefits from exclusivity; and a later period when the patent protection is lost and generic competition is possible.
Arena partnership with Eisai demonstrates management knows the importance of maintaining its freedom to operate, which is essential for an originator company to ensure that its research options remain as open as possible, in particular with regard to further development of its own inventions. Wall Street doesn't understand this aspect of the business as demonstrated by their bet against Belviq approval.
4. ARNA is a buyout, merger, or partner candidate.
According to Ibisworld, 13 blockbuster drugs will lose patent protection through 2013. One example, between 2010 and 2012, drugs that make up 42% of Pfizer pharmaceuticals revenue will lose patent protection. Big pharmaceutical companies need blockbuster drug companies more than ever. I believe Arena will either be bought out or merge with Eisai. It is very common for a pharmaceutical company with a high stock price (P/E Multiple) relative to earnings to use the stock as currency. A merger with Eisai in a stock for stock deal is the most likely event.
On the other hand, in this environment of shrinking blockbuster sales, a Big Pharmaceutical can easily afford to buy Arena in cash or stock and cash combination. Accountants and financial experts will agree that pharmaceutical companies like Pfizer, Abbot Labs, Astrazeneca , Novartis, and Merck & Co.,, just to name a few, have existing complimentary marketing infrastructure capable of making Belviq sales a source of virtually pure profit. The value of Arena on a 7 times multiple of past projected historical sales data (referred to above for drugs serving huge medical needs) alone would put Arena at $7-$10 Billion in a buyout scenario. However, Arena comes with some enticing benefits for a pharmaceutical suitor - 10 year Swiss Tax Haven and R&D Write-offs. How does Arena's proven unique drug discovery technology factor into the equation? Is there any doubt a pharmaceutical company would have to pay a premium for the hundreds of patents this technology has created. We challenge Wall Street either to agree with us or give us concrete analysis to the contrary.
Therefore Arena is a red-hot buy in my opinion. Arena's stock is temporarily beholden to the wave of short interest attacks sitting at all time highs of 43,934,871 as of August 31, 2012. The shorts, according to some experts who teach short selling, appear to have been misled into believing DEA Classification is the equivalent to FDA approval. This is absurd, and the short's are wrong again! The Drug Enforcement Administration is a scheduling classification used for drugs that have a likelihood or potential of being abused. For the record, during all pre-approval testing Belviq did not show any clinical abuse potential. No matter what DEA classification Belviq is given, I think it will be a blockbuster drug! Eisai will announce pricing and when Belviq will be available.
Arena's stock is trading at an extremely low price of $8.37/share. The 52-week high is $13.50/share. Arena is a long-term growth stock and the floodgates are about to open. The first catalyst is receipt of DEA classification. Then, we will have an obesity drug with broad FDA labeling, ready to treat obesity related comorbidities, by physicians who hold the key to demand and will use this drug with broad discretion. Simply put, it is the best single agent for obesity and its associated diseases. The news about the company's fundamentals will get better with the stream of news from the DEA, Eisai Pricing, Belviq Roll-Out, and the Big Pharmaceutical deal which could come at any time.
Foolish Bottom Line
When it comes to do-or-die businesses, the biotech industry takes the cake. Arena Pharmaceuticals is one recent success story in the industry after gaining FDA approval for its innovative obesity drug. While the future looks bright for Arena, there are still plenty of obstacles ahead. In The Fool’s brand new premium research report on Arena Pharmaceuticals, we walk investors through the must know opportunities and threats facing the company. Since key news can develop quickly, they're also including a full year of updates for those who sign up. Click here now to learn more.
MRJOSEPHD owns shares of Arena Pharmaceuticals. The Motley Fool owns shares of AstraZeneca plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.